Friday, 7 May 2010

Market Integrity and Today's Free-fall Drop

Today's mind-blowing momentary stock market plummet is more significant than just a record. It is extremely troubling to me as an ordinary investor.

Why? It is the patently unfair decision to cancel trades executed during the momentous drop. If I have a brain fart or a fat finger moment, my brokerage doesn't say, "oh yeah, that's ok, we accept that you didn't really mean it and send me back to where I started." The CTV news report Markets sent reeling after possible trading error says that automated programs caused or accelerated the fall. Well, if the people and companies who build and use such programs get a speed advantage over me then it is only fair that they suffer the deficiencies as well. If a few companies get wiped out by their unwise reliance on program trading then others will be a little more careful about testing and putting limits on them. Let's remember, someone else was on the other side of those trades, buying when the machines did their panic selling. Why should they be denied their opportunistic profits? Caveat emptor is a basic principle of commerce. Having made the oops trading mistake myself, I am a lot more careful to check what I am doing before pressing the "Trade" button.

The fact that all markets suffered the same drop at the same time means that it wasn't a problem with markets functioning incorrectly (indeed, Nasdaq is quoted in the CTV news item as saying its systems worked properly). It was big trading house computers bailing out in a crash before the ordinary joe. There cannot be two sets of rules for different types of investors.


Frog of Finance said...

Those were exactly my thoughts when I read that they would cancel those trades. If I make a mistake like that, I have to eat it. But not the big players. Money makes its own rules, apparently.

Why I am not surprised?

Michael James said...

What limits are placed on trades made through a discount broker? If I enter a trade to buy a billion shares of Microsoft, I'd hope that my discount broker would block it.

CanadianInvestor said...

Michael, There is an automated limit placed on the possible size of a trade, what my main broker BMO Investorline terms 'Buying Power', which in addition to cash, is based on your margin limits calculated on the value of other existing holdings. Margin is the amount you can borrow from the broker and it gets calculated in real time - if your holdings plummet then your margin limit goes down, so you must either pony up more cash right away, or your holdings will get sold to cover.

Michael James said...

I assume that by "automated limit" you mean that the software will block the trade if it would put the investor over the buying power limit. I would hope that cash accounts (rather than margin accounts) would be even more restrictive. It would make sense to limit sell orders to the number of shares held and limit buy orders to the amount of cash available. But, I don't know whether the software would actually block trades that exceed these limits. said...

Yeah, I freaked out too when I saw the cancellation of those trades. I bet there's more to this than we think. *puts on conspiracy hat* :)

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